Question

You have worked your whole life and have been able to build an estate worth $7M.

• Part of this is your house and other tangible assets, but $5.5M is cash invested in stocks and bonds.
• You have planned to be able to live on the proceeds of this $5.5M portfolio and leave $2M to each of your three children in 25 years.
• Your advisor has estimated that your annual expenses of home maintenance, taxes, living, travel, and recreation is $300,000 per year.

What kind of return will you need to have on this $5.5M to accomplish your plan?

4a. At year 10, the securities market experienced a sharp reversal and your portfolio declined 30%. What kind of return will you need for the remaining 15 years in order to meet your retirement plan? Show all your work.

Answer 1

1: Using financial calculator

Input: PV = -5500000

Fv=6000000

PMT=300000

N=25

Solve for I/Y as 5.63

Hence the rate of return = 5.63%

2: : Using financial calculator

Input: PV = -5500000, PMT=300000

I/Y = 5.63, N = 10

Solve for FV as 5624354.87

After decline, value of the portfolio at Year 10 = 5624354.87*(1-30%)

=3937048.41

Using financial calculator

Input: PV =- 3937048.41

Fv=6000000

PMT=300000

N=15

Solve for I/Y as 9.36

Hence the required return for the remaining 15 years= 9.36%